Lawyer and Consultant Fees for Negotiating Lease

In Clearfield there is a land group which has been offered a "deal" from a local attorney and investment consultant. A landowner friendly lease has been written and the attorney and investment consultant indicate they will market the lease and properties (they are hoping for 10,000 acres or more) to established oil/gas companies who have capabilities for drilling horizontally.

They've attached a power of attorney to the lease which indicates, should they obtain a $3,500 per acre bonus for a five year lease and 15% royalty, we pay no attorney, etc. fees. For any increase above the $3,500 per acre bonus and 15% royalty, the Power of Attorney provides the organizers 50% of the bonus and royalty over the base amount.

The rationale is that the land group, which has splintered over the past year with a reasonable portion signing with companies, doesn't have the combined strength or coordinated acreage to negotiate better than A $3,500 and 15% and it would take a reasonable effort to get a gas/oil company to agree to a land friendly lease similar to what is being provided.

I'm aware of agreements that provide 5% of the bonus to the attorney and other similar arrangements. I have my own opinions about this particular offer (not good ones) and, in particular, I have great concerns about taking 50% from the royalty above 15%.

I would like to hear from those with knowledge of similar offers and oil/gas attorneys who are able to respond objectively on this topic.

Replies to This Discussion

Wow. How many man hours have they (the attorney and consultant) spent working on this? I spoke to an attorney about reviewing my lease and he said he would charge for his time only, same as any other contract review. If they get $4000/acre and have 10,000 acres, thats a $2,500,000 fee. An extra 1% royalty (.5% fee) on 10,000 acres could easily add up to more that $5,000,000 over the life of the wells, assuming 75% development and gas prices what they are.

I know some, although not a ton, about this landowner group. Obviously people are going to have quite differing opinions about leases, lease fees, attorney’s fees, consultant fees, and consultants and attorneys in general (Oh yeah, What do you call a van full of attorneys at the bottom of the river? A good thing!; What’s the difference between an attorney and a trampoline? You take your boots off to jump on a trampoline; When a lawyer tells his clients he has a sliding fee schedule what he means is that after he bills you it’s financially hard to get back on your feet. The last two are from 101funjokes.com). I’m not going to go into some sort of rant criticizing or defending landowner groups or any fees being charged. I’m just going to say that anyone can organize a landowner group. Anyone can charge whatever they want. Anyone can opt not to sign with a landowner group, negotiate a lease themselves, hire an attorney, or hire a consultant. And anyone can have her/his own opinion about any of these things (I recall a simile involving opinions and orifices). I think people just need to decide whether paying someone a fee is simply not palatable to them, whether they can do a better job on their own, whether they really know what they’re doing and what they’re talking about, or whether a paying a fee is justified in the form of the return produced. In my opinion, where I believe people make a mistake is saying to themselves and their neighbors and friends, “Look at John Doe is getting paid for this!” That thought/statement is definitely a concern and you’d be imprudent not to give it full and serious consideration. But the primary question that one should be asking themselves is, “What am I getting paid out of this?” I’m a cost-benefit analysis type of person, and this leasing rush is the perfect time to employ such thinking (while not disregarding all of the other detailed and important terms of the leases). Let’s say you have 100 acres of completely unleased ground. Scenario A: Consultant charges a fee of 25% on the bonus payment and 50% of the royalty over 15%. Scenario B: A nun (this isn’t a denominational thing, I was just thinking of someone hyper-honest) with a Master’s in geology charges a fee of 10% of the royalty and a 1% royalty override. Obviously, who would you hire? No brainer, no doubt the nun, right? Wrong. Big mistake. You hire the Consultant because the consultant has 20,000 in his group, can get you $5,000.00 per acre and an 18% royalty paid at the wellhead. You keep $375,000.00 and pay the Consultant $125,000.00. Your 16½% royalty is at wellhead price and the Consultant gets an override royalty of 1½% also at wellhead price. If you had hired the nun, who is representing 10 landowners who have 500 acres in the township, she does a great job but can still only get you $4,000.00 per acre, however, you think she does a great job because she also gets you an 18% royalty while only keeping a 1% override. You keep $360,000.00 and pay the nun $40,000.00. The 18% is great, but your 17% royalty is paid at the point of sale and so all of the fees and costs are taken out of the 17% and paid to the gas company’s sister (no pun intended – really) pipeline company and the nun gets an override royalty of 1% also with deductions. Hence, after costs, which you really have no idea what they’re for or whether they’re fair and you know you can’t possibly beat the multi-billion dollar, multi-national gas and oil company, your royalty nets out to be 14%. (In reality, if the nun wasn’t such an honest lady she would have just negotiated the best bonus she could get and signed a lease because she has no incentive on working to get a higher royalty because she gets 1% even if she gets a higher royalty –which is why contingent fees are one of the best things to keep someone working for you and getting them to negotiate the best deal they possibly could – for every extra dollar or fraction of a % you get they get as well.) So really all I’m saying when it’s all boiled down: Focus on the positive side of the representation – i.e., what are you getting – rather than the negative side of the representation – i.e., what is my agent getting. Sure you should care what they’re getting and do the best you can for yourself, but if you can hire someone that charges more and you net more, then it’s my personal opinion that one would be making a major mistake. Hey, I’m not going to say that I’ve never benefitted from a contingent fee agreement, but I can tell you that in every one my clients have had the same benefit. Plus, we haven’t even touched upon the subject of the fact that if the deal never gets inked, then the representative gets a big, fat I.O.U. – nothing! There’s also the consideration that some people can’t front the money that it often takes for (decent) representation. I represented a man who had 125 acres of property (almost half of the state away) that his brother and sister deeded to him 25 years ago and that he had never stepped foot upon. He was literally 8 days away from a default judgment being entered against him. He had what I thought was a great case. He said that he had previously talked with no less than 4 attorneys, but none of them would take the case because he didn’t have any money to pay them. He was also very upset because the property had been in his family in excess of 100 years. I told him that I would take the case under a contingent fee agreement because I thought he had a great case and I was confident enough in my legal analysis to risk not getting paid if he lost. Well, he was offered $75,000.00 (750% of what he was offered before I began representing him) within a month of me beginning my representation of him. Three years later right before trial he was offered $125,000.00. I told him not to take it because the property was worth much more than that. We tried the case and won. Seven years after I took the case we won the case at the (Pennsylvania) Supreme Court. As it turned out, the property had unleased natural gas rights, another significant valuable commodity, and, of course, the acreage. What did he have into it? He showed up for a two-day trial and testified for a couple of hours. So instead of a default judgment being entered against him and him losing his family property, he was able to retain a half a million dollar asset and pay me off. The client couldn’t have been happier to write a six-figure check. I could cite you numerous other examples just like that. So really, it’s not about the percentage or the fee so much as what will you get out of, will your net be bigger paying it, what expertise is being brought to the table, and is the fee structure aligned with my interest so that there’s mutual benefit. Nevertheless, I understand that people are entitled to their own opinion. Well, at least I'll admit it when I'm wrong . . . I guess I was wrong when I said I wouldn't get into a rant or defense. I guess I was way off on that one.

DISCLAIMER (i.e., CYA - or CMA I suppose): Attorney-Client Privilege/Confidentiality is not established and does not apply to either questions or responses. Hence, do not disclose any confidential information (which would be really stupid anyway since thousands of people are reading this stuff). Responses are not to be taken as legal advice. Only one piece of legal advice is being given: HIRE YOUR OWN ATTORNEY TO HANDLE YOUR OWN SET OF FACTS AND DISTINCTIVE LEASE TERMS AND ISSUES! A brief recital of facts and issues in a discussion forum can NEVER convey all of the facts in each idiosyncratic case. Likewise, a brief response to those incomplete set of facts and issues in a discussion forum can NEVER convey a functional analysis of your unique situation, and, as such, cannot be relied upon by you as legal advice for your unique situation. Believe me, fact situations are about as similar as fingerprints. Moreover, all of my responses are talking about Pennsylvania law because that is where I am licensed. That means if you are from outside of Pennsylvania you can go ahead and throw everything I said right out the window (darn, I was trying to make it through this without resorting to a cliché . . . or a French word). Thus, while my responses might be free, they are not legal advice. Do not be so stupid as to try to save $1,000.00 whenever you have the opportunity to make $100,000.00. So take it from Warren Buffett – “Price is what you pay. Value is what you get.” If you do not pay the price you will really pay the price. I hope I avoided ticking you off, but hey, wasn’t that a great disclaimer!

I believe you are flawed in your thinking here...Why would you want paid at the well-head? Sure there is more volume, but it's not worth as much as it is at the point of sale. Also, why would the nun negociate 17% NET at the point of sale rather than 17% GROSS? I don't see how you are comparing apples to apples when you basically hire an idiot in either case?

You're right, I intended to convey that the royalty was without deductions, but I should have said just that and then referred to the point of sale. A landowner would be better off to be paid at wellhead (which would be without deductions for fees and costs) rather than being paid somewhere else but permitting deductions. However, yes, the best place to get paid would be at the point of sale (without deductions). As far as your question, my major point to make was you have to look at the details behind the numbers and the person before you jump on it because there are so many very important variables.

I appreciate the message, but paying more doesn't always give you more (money and protection). I understand contingency legal fees range from 20 - 50%. In this case, (with a 50% contingency fee) it appears we have the best legal representation possible and the most to gain. With several thousand acres, most of the acreage in this case would come from a previously existing landowner group. The firm did write a very good lease (most obtainable from lease addendums on the web) and they will need to market it to an oil and gas company or three (possibly this is similar to going to trial). If there is reasonable success it means quick millions to the lawyers and some landowners with larger holdings and additional money the rest of us that we may not have been able to gain on our own. We should be pleased.

For me, paying 50% on a portion of the future royalty earnings for 10, 15 or 20 years, is hard to reconcile. I'm sure there is a more equitable option for the landowner.

There's certainly nothing wrong with being a principled fellow - and life is not all about logic. You've got to do what's right for you. Who knows, you may be right passing on this "deal". If a company buys up all of your neighbors' leases all around you, then you might be able to get the same - or close to the same - deal and not have to pay that 50%. Obviously, no one wants to pay that kind of money if they don't have to. Let us know how it all works out for you. Best of luck.

A knowledgeable O&G attorney is usually a good investment when negotiating an O&G lease. I would suggest that the attorney fee be a flat rate or hourly rate. DO NOT give them a percentage of your bonus or royalty as their fee.

Good advice....I think too many people are all to eager to give up a small percentage to obtain a comfort level in their negotiations, not realizing that such a small interest could equate to big, big dollar amounts over the life of any potential well drilled. Flat or hourly rate (regardless of what the rate is set at by the council providing assistance) should be more than adequate consideration.

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